Thursday, January 1, 2009

Dr. Goldratt proposed that there are just two categories of things that can go wrong. One he calls unreliability and the other ineffectiveness. These two things account for everything, and have no overlap.

Unreliability is not doing things that need to be done. Ineffectiveness is doing things that did not need to be done, but were nevertheless. Stop and think about it, and you’ll realize that ineffectiveness is the major cause of unreliability.

Unreliability is not meeting promises. It is often currently verbalized and measured as “due date performance”. In TOC, in order to measure the duration of lateness as well as the dollar magnitude, we multiply the days an order is late by dollar value of an order (and sum for all orders) to get total “Sales Dollar Days”. A lower number is better, with the objective of achieving and maintaining zero sales dollar days every day.

Ineffectiveness is doing things too early, or that didn’t need to be done. In physical terms, it is work-in-process, or inventory. In TOC, in order to measure the duration of time inventory has accumulated as well as the dollar magnitude, we multiply the days inventory of a part has existed times the dollar value for each part (and sum for all parts) to get total “Inventory Dollar Days”. Again, a lower number is better, but zero is not attainable, so the objective is to continuously improve.

Many of the current measurements used in organizations have the intent of controlling costs. In previous articles, we’ve proposed Throughput Accounting as the preferred alternative to Cost Accounting.